Big Trade in Stock Index Options Puzzles Experts

An investor bought $16.6 million in call options on the Standard & Poor’s 500 Index on Tuesday, a strategy that will be profitable if the U.S. equity benchmark rallies in the next five months.

The trader purchased 17,800 March calls with a strike price of 1,925 on the S&P 500, making it the most-traded contract on the index, according to data compiled by New York-based Trade Alert LLC. The person, who picked up three other bullish options on the stock gauge, will make money on all the contracts should the S&P 500 advance more than 9 percent by March.

“It’s such a huge trade,” Frederic Ruffy, a Chicago-based senior options strategist at Trade Alert, said in a phone interview. “It’s hard to say what the motivation is. It could be an outright bullish bet on stocks or someone who is massively bearish and uses options as a hedge.”

Stocks have soared this year, putting the S&P 500 on track for the biggest gain since 2003, after companies reported higher-than-estimated earnings and the Federal Reserve kept its stimulus plan. Instead of selling shares to lock in profits during rallies, investors almost always add them in the final quarter. The S&P 500’s return has been positive over November and December every year since the bull market started in 2009.

The March 1,925 calls cost $4.40 per contract, according to data compiled by Bloomberg. The investor bought 4,300 March calls with a strike price of 1,850 for $15.90 per contract as well as 8,700 January 1,920 calls for $1 each. About 1,800 January contracts with a 1,850 strike price were purchased for approximately $5.80 each. The total coast of the trade was about $16.6 million, the data show.

Real Money

“It’s a lot of premium,” Neil Azous, founder of Rareview Macro LLC, a Stamford, Connecticut-based advisory and research firm, said in an interview. “It could be a real-money investor or a large hedge fund underweight U.S. equities.”

The S&P 500 has risen in the final two months of the year 82 percent of the time since 1928 when the benchmark gauge advanced at least 10 percent through October, data compiled by S&P and Bloomberg show. The mean November and December increase of 6 percent would lift the index to 1,862.79, an all-time high.

A total of about 563,000 options traded on the S&P 500 Tuesday, 20 percent below the 10-day average. More than 243,000 calls to buy the index changed hands. The contracts involved in Tuesday’s trade, which expire on Jan. 18 and March 22, accounted for 5.8 percent of the trading.

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, climbed 2.6 percent to 13.27. The measure is down 26 percent this year.